How freelancers and contractors can be more tax efficient

How freelancers and contractors can be more tax efficient

Freelancers or sub-contractors can be more tax efficient if they understand expenses.

While they may not have total job security, freelancers love the flexibility they have. Working for different clients makes life more interesting.

There are times when freelancers worry about their next project. Getting their financial house in order helps during those tougher times.

One area freelancers must be aware of is being more tax efficient by correctly claiming allowable expenses. But remember, those expenses must be allowable by HMRC and must be for the purpose of your business.

Claiming for anything that is not allowable could land you with paying taxes back at a later date!

Be more tax efficient through expenses

The rule of thumb used by HMRC is that expenses must be ‘wholly and exclusively’ for your business. If they are genuine then it can reduce your tax bill.

For example, if you earn £30,000 but spend £5,000 on allowable expenses then you will only pay tax on £25,000. That is because only that portion is classed as ‘taxable profit’.

Expenses can include things such as:

  • Office equipment: This includes desks, stationery or IT goods such as computers or printers.
  • Staff costs: Many freelancers choose to sub-contract work to other freelancers during busy times. These costs can be added to your expenses.
  • Travel costs: If you travel to meet clients or to work-related meetings, you can claim fuel, train or bus fares.
  • Business premises: Although working from home is more popular than ever, some freelancers like to work from offices. Office rent, lighting and heating can all be classed as expenses.
  • Advertising or marketing: If you have pay-per-click ads or pay someone to maintain your website, these are all classed as expenses.

Many freelancers choose to work from home – something they perfected long before coronavirus. But it can be more complicated when it comes to claiming expenses.

If you are renting, you should be able to claim a portion of your rent as an expense. It depends how much time you work at home and what proportion of your home is taken up by work.

HMRC says that you must apportion the running costs of your home on a ‘fair and reasonable’ basis between the private element of the cost and the part that relates to you living there.

There are several ways to calculate this and we can always help you determine how much you should be claiming.

Charity donations

For those paying the higher rate of 40%, adding charity donations to your tax return reduces your bill as you can claim extra tax relief.

So, if you are sponsoring a friend in the Great North Run or giving money to a cause through Just Giving, you’ll be able to claim tax relief.


When you start out, you may handle tax and accounting issues yourself, but beware as you may end up paying more tax than you should.

Adopting accounting software is useful and helps you understand what you can and can’t claim.

Hiring an accountant to handle your self-assessment not only helps you get rid of a tricky task, it also means you are more likely to make the most of your finances.

To find out more about our self-assessment services, which include monthly packages, get in touch for a friendly, no obligation chat.

Becoming limited 

If your business is growing, it may be worth setting up as a limited company to reduce your tax payments. We have looked at limited companies and how they are set up in the past few weeks, so check out that blog for more details.

Being a limited company means you are a director. As a result, HMRC allows you to draw a certain part of your earnings as dividends. For basic rate taxpayers (0 to £34,500), this is taxed at 7.5%.

This allows you to reduce your salary to a lower tax bracket and claim the rest as dividends, thereby reducing the amount of tax you pay. 

We’re always happy to help anyone who is unsure about their expenses or self-assessment.

Contact us today for any questions about tax, self-assessment or becoming limited.